Peter Wilson v The Commissioners for HMRC

For determining whether an LLP member is to be treated as employed by the LLP, the first question under section 4(4) of the Limited Liability Partnerships Act 2000 is whether, in the statutory notional partnership, the individual would be a partner. It is unnecessary first to apply the ordinary employee-or-self-employed test.

The partnership question is one of substance. The court must consider the parties’ rights and obligations as a whole, including profit entitlement, management rights, liabilities and any capital interest. Labels are not decisive, but contractual terms must be construed according to their natural meaning.

HMRC decided under section 8 of the Social Security Contributions (Transfer of Functions etc) Act 1999 that Peter Wilson was a self-employed earner during the period 31 October 2012 to 31 March 2014 and was therefore liable to national insurance contributions. The First-tier Tribunal dismissed his appeal.

Mr Wilson appealed to the Upper Tribunal on three grounds. He challenged the FTT’s understanding of section 863 of the Income Tax (Trading and Other Income) Act 2005, its treatment of section 4(4) of the Limited Liability Partnerships Act 2000, and its conclusion that the payments were made to him as a substantive LLP member rather than an employee.

1. Appeal dismissed. The FTT made no material error of law on Ground 3. That conclusion determined the appeal.
2. Ground 1 was academic. The FTT had treated section 863 of the Income Tax (Trading and Other Income) Act 2005 as a free-standing basis for determining the tax treatment of an LLP member, but the Upper Tribunal did not decide whether that provision operated as a deeming provision.
3. Ground 2 was not determined. The Court of Appeal’s decision in Tiffin v Lester Aldridge [2012] EWCA Civ 35 was binding. The FTT had treated observations in Clyde & Co LLP v Bates van Winkelhof [2014] UKSC 32 as overruling Tiffin, but the Upper Tribunal considered it unnecessary to resolve that debate because Ground 3 was dispositive.
4. The correct approach under section 4(4) was first to ask whether Mr Wilson would have been a partner in the notional partnership. Only if he would not have been a partner could the question of employment arise. The FTT was therefore right not to begin with the ordinary contract-of-service analysis.
5. Applying sections 1 and 2 of the Partnership Act 1890, the relevant question was whether Mr Wilson was carrying on business in common with the other members with a view to profit. The FTT was entitled to rely on the substance of the contractual arrangements. Mr Wilson’s First Charge was payable only out of LLP profits; he had a 25% entitlement to profits from international tax work; he retained significant voting rights and other membership rights and obligations; and the Side Letter gave him an interest in the capitalised value of future profits.
6. The description of the remuneration as a First Charge was not impermissible reliance on a label. It reflected the natural meaning of the contractual provisions, under which no remuneration was payable if the LLP made an overall loss.

• Upper Tribunal (Tax and Chancery Chamber): dismissed the appeal.
• First-tier Tribunal: dismissed Mr Wilson’s appeal against HMRC’s decision that he was a self-employed earner for the relevant period. The FTT decision was released on 20 May 2020.
• HMRC: decided on 21 March 2018, under section 8 of the Social Security Contributions (Transfer of Functions etc) Act 1999, that Mr Wilson was a self-employed earner.